Best of the Week
Most Popular
1.Gold Price Trend Forecast, Where are the Gold Traders? - Bob_Loukas
2.Stocks Bear Market of 2017 Begins? Shorting the Dow At its Peak! - Nadeem_Walayat
3.Betting on President Trump Leaving Office Early, Presidency End Date - Betfair Market - Nadeem_Walayat
4.Why Stock Market Analysts Will be Wrong About 2017 - Clif_Droke
5.Is This The Best Way For Investors To Play The Electric Car Boom - OilPrice_Com
6.Silver Price 2017 Trend Forecast Update - Video - Nadeem_Walayat
7.Gold Price Set For Very Bullish 2017, Trend Forecast - Austin_Galt
8.10 Things I learned From Meetings With Trump’s Transition Team - - John_Mauldin
9.How Investors Can Profit From Trumps Military Ambitions - OilPrice_Com
10.Channel 4 War on 'Fake News', Forgets Own Alt Reality Propaganda Broadcasting - Nadeem_Walayat
Last 7 days
Underperformance in Gold Stocks Argues for Interim Peak - 25th Feb 17
Watch What Happens When Silver Price Hits $26...  - 25th Feb 17
Gold Futures Buying Yet to Start - 25th Feb 17
When the Stock Market Flying Pig Tops - 24th Feb 17
Gold, Second Fed Hike and Interest Rates - 24th Feb 17
Bitcoin Price Hits Record High! - 24th Feb 17
Another Stock Market Bubble? Bring it On! - 24th Feb 17
What Investors Need To Know About U.S. Money Market Funds? - 24th Feb 17
When Was America’s Peak Wealth? - 24th Feb 17
The Oscars – Worth Their Weight in Gold? - 24th Feb 17
The Best Reasons to Buy Gold in the Age of Trump - 22nd Feb 17
Silver, The Return of Stagflation - 22nd Feb 17
Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - 22nd Feb 17
Gold: Short End US Rates Matter More Than Long End Real Yields - 22nd Feb 17
CONTINENTAL RESOURCES: Example Of What Is Horribly Wrong With The U.S. Shale Oil Industry - 22nd Feb 17
Here’s Proof Rising Rates Are Good for Gold - 21st Feb 17
Gold and Silver Weekly Update - 21st Feb 17
US Dollar and Gold Battle of the Cycles - 21st Feb 17
NSA and CIA is the Enemy of the People - 21st Feb 17
Big Moves in the World Stock Markets - Big Bases - 21st Feb 17
Stock Market Uptrend Continues - 21st Feb 17
Brent Crude Oil Price Technical Update: Low Volatility Leads to High Volatility - 20th Feb 17
Trump’s Tax System Could Spark The Wave Of Self-Employment - 20th Feb 17
Here’s How to Stay Ahead of Machines and AI - 20th Feb 17
Warning Signs Of Instability In Russia - 20th Feb 17
Warning: This Energy Investment Could Wreak Havoc On Your Portfolio - 20th Feb 17
The Mother of All Financial Bubbles will be Unimaginably Destructive when it Bursts - 19th Feb 17
Gold’s Fundamentals Strengthen - 18th Feb 17
The Flynn Fiascom, the Trump Revolution Ends in a Whimper - 18th Feb 17
Not Nearly Enough Economic Growth To Keep Growing - 18th Feb 17
SPX Stocks Bull Market Continues to make New Highs - 18th Feb 17
China Disaster to Trigger Gold Run, Trump to Appoint 5 of 7 Fed Governors - 18th Feb 17
Gold Stock Volume Divergence - 17th Feb 17
Gold, Silver, US Dollar Cycles - 17th Feb 17
Inflation Spikes in 2017, Supporting Gold Prices Despite Increased Odds of March Rate Hike - 17th Feb 17
Roses Are Red... and So's Been EURUSD's Trend - 17th Feb 17
Gold Trade Note Sighted - 17th Feb 17
Gold Is Undervalued Say Leading Fund Managers - 17th Feb 17
NSA, CIA, FBI, Media Establishment 'Deep State' War Against Emerging 'Trump State' - 16th Feb 17
Silver, Gold Stocks and Remembering the Genius of Hunter S. Thompson - 16th Feb 17
Maps That Show The US’ Strategy In Asia-Pacific - 15th Feb 17
The Trump Stock Market Rally Is Just Getting Started! - 15th Feb 17
Tesco Crisis - Fake Prices, Brexit Inflation Tsunami to Send Food Prices Soaring 10% 2017 - 15th Feb 17
Stock Market Indexes Appear Ready to Roll Over - 15th Feb 17
Gold Bull Market? Or was 2016 Just a Gold Bug Mirage? - 15th Feb 17
Here’s How Germany Buys Time From China - 15th Feb 17
The Stock Trader’s Actionable Guide to Trump - 15th Feb 17
Trump A New Jacksonian Era? The Fourth Turning (2) - 14th Feb 17
Stock Market Yet Another Wall Street 'Witch's Brew' - 14th Feb 17
This Is Why You Don’t Own A Lot Of Stocks - 14th Feb 17
Proposed Tax Reforms Face Enormous Headwinds - 14th Feb 17

Market Oracle FREE Newsletter

State of Global Markets 2017 - Report

It's Time to Brace for a Repeat of Financial Crisis 2008, Recession 2012

Stock-Markets / Credit Crisis 2012 Dec 13, 2011 - 07:51 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: If you think the global economy is out of the woods now that the European Union (EU) has expanded its effort to solve the sovereign debt crisis, then I'm afraid you're sorely mistaken.

No doubt, the European crisis is far from being solved - but that's hardly the only potential economic catastrophe looming on the horizon.


Indeed, two successive articles in the Financial Times last week warned of a new disaster approaching: They forecast 25% declines in financing volume for both commodities finance and aircraft purchases in 2012.

Now that would be truly bad news.

You see, the most job-destroying feature of the 2008-09 recession was a 17% decline in world trade that was caused by the financial crash and the disruption to the world's banks. That decline intensified recessionary conditions and caused millions of job losses worldwide. Some 700,000 jobs were being lost each month in the United States alone for a period in early 2009. That's more than double the previous worst monthly losses since World War II.

And now we could be in for a repeat.

In fact, it's hard to see how one can be avoided.

In today's distorted world financial system, a combination of over-loose monetary policy, intractable budget deficits, and tightening regulation seems to have made a credit crunch more or less inevitable.

So if you're smart, you'll take a moment to examine exactly why, and then figure out who the winners and losers are going to be.

Here's how.

A Disruptive Disconnect
When you look at bank lending, it's clear that the link between the huge amount of world money growth and the meager supply of lending to productive enterprise is broken.

U.S. Federal Reserve Chairman Ben S. Bernanke and his international colleagues can hand as much money as they like out to banks, but if the banks don't lend it, that money will be wasted. And right now the banks aren't lending to trade and private businesses for three reasons: •The Yield Curve: Central bankers have kept short-term interest rates far below the level of long-term rates and have made it clear that they will intervene if long-term rates rise. Banks can borrow short-term, lend in the long-term markets, and through this "gapping" use massive leverage to boost their returns.

•Regulatory Loopholes: Basel Committee banking regulations currently allow banks to escape allocating capital to their holdings of Organization of Economic Cooperation and Development (OECD) government debt. These regulations allow banks to play the gapping/leverage game without limit, provided they invest in government or government-guaranteed bonds. This has financed the gigantic budget deficits of recent years. However, it has also "crowded out" private sector lending.
•Limitations On Capital: Banks have ample liquidity, but they have only a finite store of capital. Accordingly, if regulators force banks to hold more capital, their loan volume will be limited and they will no longer be able to expand lending (other than to governments). Currently, banks can only raise more capital at below their net asset value, diluting their existing shareholders.

Even the "shadow" banking sector - the brokerages, money market funds, hedge funds and structured investment vehicles that provided massive lending volumes before 2008 - cannot help much now.

Structured investment vehicles are, for obvious reasons, a lot less popular than they were before 2008. Hedge funds were until this year even more popular than before 2008, but their suddenly cautious bankers don't let them leverage themselves like they used to. Money market funds have shrunk because their returns have been pathetic for the last three years. Meanwhile, inflation has risen, eroding the real value of their investors' capital.

So the shadow banking system won't be able to make up for lending cutbacks in the banks.

Indeed, the string on which the Fed is pushing is completely slack, and another $1 trillion of Fed monetary stimulus won't lead to even an extra dollar of productive loans.

The solution?

Interest rates need to rise. That will increase the supply of savings, reduce the ability of banks to make money through gapping/leverage games, and restore the linkage between massive systemic liquidity and sluggish productive lending.

Of course, while Ben Bernanke and other current central bankers are in charge, higher interest rates are off the table - regardless of how beneficial they might be.

Now here's what that means for 2012.

Preparing for the 2012 Recession
With interest rates so low and banks so restricted, the chance of a true credit crunch is quite high.

That means countries with large budget deficits - notably Britain, Japan, and the United States - could suddenly see interest rates rise and funding dry up abruptly.

Emerging markets would be divided into those with ample domestic savings or currency reserves - China, Taiwan, Singapore and Chile, for example - and those with bloated public sectors and extravagant consumers - the majority of Latin America, Brazil and India.

Liquid emerging markets would do fine, but illiquid emerging markets would suffer badly - think Latin America in the 1980s and Asia after 1997.

In the private sector, businesses such as aircraft financing and commercial real estate that are chunky and not especially people-intensive could find funding through the shadow banking system, albeit at higher rates than they are used to. However, small businesses and trade finance would find funding much harder to come by.

The existence of vast pools of liquidity would support commodity prices, unless the world suffered a major economic downturn. And gold and silver, which are safe havens in times of crisis that do not depend on a smoothly functioning banking system for their support, would probably do quite well.

Some trade financing might be carried out in gold, with sellers happy to carry buyers' credit risks on their balance sheets provided they could be repaid in an inflation proof asset with no linkage to troubled financial systems.

The bottom line is that in spite of, or to some extent because of, the efforts of Bernanke and his cronies, a credit crunch and another massive drop in world trade volumes is quite likely in 2012.

Only a modest money market shock would set one off, and with Europe tottering such a shock seems very likely indeed. We should be prepared.

To safeguard against any trouble, you might consider the iShares MSCI Singapore Index ETF (NYSE: EWS), the iShares MSCI Taiwan Index ETF (NYSE: EWT), and the Aberdeen Chile Fund (NYSE: CH), which I recently recommended in my 2012 emerging markets outlook.

It'd also be a good idea to add to your precious metals holdings through the SPDR Gold Trust ETF (NYSE: GLD). Don't hedge this risk through gold alone, however. If the 2008 crunch repeated exactly, its price would fall rather than rise.

Source :http://moneymorning.com/2011/12/13/its-time-to-brace-for-a-repeat-of-2008/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife